Retroactive Tax Increase on Highest Taxed State
Filed under: California, Tax Rates | Tags: Alabama, Alaska, California, Dakota, Florida, Hawaii, high tax state, Iowa, Louisiana, Mississippi, Montana, New Jersey, New York, Oregon, proposition 30, South Carolina, Tax rates, Tennessee, Texas, Vermont, Washington D.C., Wyoming
Leave a Comment Originally published in the Cedar Street Times
November 30, 2012
Depending on how you look at it, Californians could now consider themselves the highest taxed state in the U.S. after our recent passage of Proposition 30 on our November ballots. Proposition 30 increased income tax rates by one to two percent on people earning over $250,000. It also made these increase retroactive as of 1/1/2012. If you are subject to these higher tax rates, be aware that your state withholdings are likely inadequate and you should talk to your tax professional about making an additional payment by April. No penalties will be assessed for under withholding to the extent that it is attributable to the tax hike, and you pay it by April 15, 2013.
Our top rate on our highest earners is now 13.3%, commanding an impressive 2.3% margin over second place Hawaii (11%), and 3.4% over third place Oregon (8.9%). Other states in the high eights include Iowa, New Jersey, Washington D.C., Vermont, and New York.
You do have to keep in mind that some places have city taxes also. But even a penthouse occupant in New York City that has a state tax of 8.82% and a city tax of 3.876% (combined 12.696%) would not have to muster up the cash of a wealthy dessert dweller in California.
Of course, there are many ways that states bring in revenue, such as sales tax, property tax, inheritance tax, auto taxes, etc. So you cannot really base overall tax burden on income taxes alone. If you are looking for overall low tax burden states you may wish to consider Wyoming, Alaska, Florida, the Dakotas, Montana, Texas, Tennessee, Mississippi, South Carolina, Louisiana, or Alabama. Different states also have distinct advantages for people earning different types of income or have different types of deductions. The more you have at stake, the more tax planning may become a factor in where you choose to reside.
If you want to know more specifically how California’s new increases may affect you, here are the details: California taxable income over $250,000 for single filers, $500,000 for married filers, and $340,000 for Head of Household filers will be taxed at 10.3%. Taxable income over $300,000 single, $600,000 married, and $408,000 HOH will be taxed at 11.3%. Taxable income over $500,000 single, $1,000,000 married, and $680,000 HOH will be taxed at 12.3%. And anyone with over $1,000,000 taxable income will also be assessed an additional 1% mental health tax.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Thanksgiving
Filed under: General | Tags: gender, health, Kennedy, national debt, politics, race, tax systems, Thanksgiving
Comments (3) Originally published in the Cedar Street Times
November 16, 2012
With less than a week to go before Thanksgiving, I would like to take the opportunity to give some gratitude. I am of course grateful for my family – my wife of 13 years, Joy, who has been my best friend since we were freshmen in college together. She is sure and steady, she is efficient, she forgives me for being an accountant and working crazy hours for a third of the year, and she is well…full of joy! I am grateful for my seven-month old son, Elijah, who brings such happiness, activity, and wonder to our lives. It’s awesome being a dad!
I am grateful for my in-laws that make us dinner or pick up milk and juice at the store, or help with projects when we need an extra hand. I am grateful for my brother, Justin, even though he lives in Washington D.C. and hasn’t set up a Skype account yet to visit with his nephew! He is the most ethical and moral person I know, and he is always there to help me think through issues critically using his attorney mind. I am grateful for the understanding, qualities, and grounding I received from my parents – there is no greater inheritance than that.
I am also grateful to be living in the beautiful town of Pacific Grove. Growing up in Atlanta, I never really thought I would live near an ocean – what an opportunity! We are blessed to have such wonder friends and neighbors, a great church community, and organizations that help us find ways to give back to our community.
I am also grateful to be living in the United States of America. Although it is easy to point out all the faults we seem to have with politics, race issues, gender issues, health systems, national debt and tax systems, our military presence around the world, or whatever you feel is unfair, this country is still a beacon of light and hope for people all over the world that are struggling with far greater issues. What other country are people clamoring to get into like the United States? What country would you rather live in, and why are you here? We do have some big challenges ahead, and it is going to take right action, as a result of our gratitude to solve these challenges. If we are truly grateful for what we have, then we will take responsibility for preserving the good for ourselves and others, even when it seems we may have to sacrifice.
I think this passage from President Kennedy’s Inaugural Address from 1961 rings true for us as well: “I do not believe that any of us would exchange places with any other people or any other generation. The energy, the faith, the devotion which we bring to this endeavor will light our country and all who serve it — and the glow from that fire can truly light the world. And so, my fellow Americans: ask not what your country can do for you — ask what you can do for your country.”
God bless you and your family and God bless America.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Your Future Tax Return: Romney Versus Obama
Filed under: General, Tax Rates | Tags: American Opportunity Credit, Buffett Rule, candidate, Capital Gains, child tax credit, corporate rates, dividends, earned income credit, Education, election, Estate Tax, FICA, foreign earnings, health insurance, HSA, income exclusions, interest, itemized deductions, Medicare, MSA, net investment income, Obama, retirement plans, Romney, student loan interest, Tax brackets, tax positions, tax-exempt interest, territorial tax system
Comments (2) Originally published in the Cedar Street Times
November 2, 2012
If tax positions would sway your Tuesday vote, here is what Obama and Romney would like to see. Keep in mind, however, you don’t always get what you want!
Tax brackets: Romney reduce to 80% of current levels. Obama keep the same as 2012 except allow top bracket to split into two higher brackets like pre-2001. (Romney, Current 2012 Rates, Obama, 2013 rates if no congressional action ) (8%, 10%, 10%, 15%), (12%, 15%, 15%, 15%), (20%, 25%, 25%, 28%), (22.4%, 28%, 28%, 31%), (26.4%, 33%, 33%, 36%), (28%, 35%, 36% and 39.6%, 39.6%)
Capital gains, interest, dividends: Romney reduce tax rate to zero for AGI below $200K. 15% max if AGI above $200K. Obama increase long-term capital gains rate to 20% max and up to 39.6% on dividends – leave interest taxed at ordinary bracket rates.
2013 3.8% Medicare surtax on net investment income and existing 0.9% medicare surtax for married filers over $250K AGI and others over $200K: Romney repeal. Obama keep.
Itemized deductions: Romney cap itemized deductions (maybe $17,000-$50,000 cap) and maybe eliminate completely for high income. Obama reduce your itemized deductions by 3% of your AGI in excess of $250K married, $225K HOH, $200K single, and $125K MFS (up to 80% reduction of itemized deductions) and limit the effective tax savings to 28% even if you are in a higher bracket.
Income exclusions: Romney keep as is. Obama cap the effective tax savings to 28% on exclusions from income for contributions to retirement plans, health insurance premiums paid by employers, employees, or self-employed taxpayers, moving expenses, student loan interest and certain education expenses, contributions to HSAs and Archer MSAs, tax-exempt state and local bond interest, certain business deductions for employees, and domestic production activities deduction.
AMT: Romney repeal. Obama keep but set exclusion to current levels and index for inflation.
2009 expanded Child Tax Credit, increased Earned Income Credit, and American Opportunity Credit: Romney – Allow to expire as scheduled 12/31/12. Obama – Make permanent.
Buffett Rule: Romney “Not gonna do it.” Obama households making over $1 million should not pay a smaller percentage of tax than middle income families. This is accomplished by raising the rates on capital gains and dividends as discussed earlier.
Temporary two percent FICA cut you have been enjoying in 2011 and 2012: Both candidates favor allowing to expire at 12/31/12.
Estate tax: Romney repeal. Obama set at $3.5 million and index for inflation with top rate of 45% on excess.
Top corporate tax rates: Romney 25%. Obama – keep at 35% for 2013 but maybe reduce to 28% in the future.
Corporate international tax: Romney don’t tax U.S. companies on income earned in foreign countries. Obama discourage income shifting to foreign countries.
Corporate tax preferences: Romney extend section 179 expensing another year, create temporary tax credit, expand research and experimentation credit. Obama increase domestic manufacturing incentives, impose additional fees on insurance and financial industries, reduce fossil fuel preferences.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Tax Changes on the Horizon?
Filed under: Tax Rates, Trusts and Estates | Tags: Alternative Minimum Tax, AMT, Bush Tax Cuts, Capital Gains, Clawback, Estate Tax, expire, Gift Tax, payroll rates, Tax Policy Center, tax rate increase
Leave a Comment Originally published in the Cedar Street Times
October 19, 2012
Unless you have been hiding under a rock, you are sure to have heard the hubbub surrounding potential tax increases in 2013. These tax increases do not require Congress to take action, but to gridlock and do nothing, which is why they stand a much better chance of actually occurring than a concerted effort to raise taxes. Most of the increases are the result of the expiration of the temporary tax decreases dubbed “The Bush Tax Cuts,” passed in 2001 and 2003 while George W. Bush was in office. There was also a two percent reduction in payroll taxes a few years ago that was meant to be a temporary stimulus for the economy. The Tax Policy Center estimates that nearly 90% of American households will face an average tax increase of $3,500 if the tax cuts expire.
If current legislation stays in place, ordinary income tax brackets will jump 3-5%, depending on your bracket. Capital gains tax will increase 5-15%, depending on your bracket, and there will be a new Medicare surtax, generally for people making over $200,000, of another 3.8% on net investment income.
Alternative Minimum Tax (AMT) is another big issue that could affect most Americans. AMT is a parallel tax calculation that runs alongside the normal system, cutting out common deductions, and if it results in a higher overall tax liability, you pay the incremental difference as additional tax.
Estate and lifetime gift tax will also get hit hard. Currently, there is a $5,120,000 exemption for the combined estate and gift tax. If you have a taxable estate above that and you pass away by December 31, the excess will be taxed at a top rate of 35%. Next year, this exemption reverts to $1,000,000 with a maximum tax rate of 55% on your taxable estate above that figure.
This certainly presents questions for you, your tax professional, and your estate planner to analyze. If you knew ordinary tax rates, capital gains, and estate tax rates were going to rise next year, you would likely try to push expected income from next year to this year, sell your stocks now that could result in a gain in the future, and gift money from your estate to your heirs. It is not quite this simple, and you should get professional assistance, but it is something to think about now rather than December 31st.
Related to the estate and gift tax issue, on Saturday morning, October 27th, I will be presenting with local attorney, Kyle A. Krasa, and local investment advisor, Henry Nigos, in a free seminar titled “Opportunities and Clawbacks – Taking Advantage of the Once-in-a-Lifetime 2012 Estate/Gift Tax Rules” from 10:00 am to 11:30 am at 700 Jewell Avenue, Pacific Grove. The seminar is sponsored by Krasa Law – please RSVP at 831-920-0205.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Can’t Finish Returns by October 15 Deadline?
Filed under: Extensions, General | Tags: 1040, Extension, K-1, late, late filing penalty, LLC, October 15, partnership, S-Corporation, trust
Comments (2) Originally published in the Cedar Street Times
October 5, 2012
If you placed your 2011 personal tax returns on extension, you have 10 days left to complete the returns and get them filed. This is especially important if you did not withhold enough tax or make enough estimated tax payments during the year to cover your tax liability that was technically due on April 17. Penalties are assessed based on the unpaid balance of tax that was due on that date. There are several penalties assessed, but the hefty penalty is the late filing penalty which equates to five percent of your unpaid tax as of April 17 for each month or part of a month the return is late (capped at 25 percent).
In the past, I have had problematic situations where a client did not receive tax documents until after October 15. This is sometimes seen when a client is invested in a partnership or has an interest in an S-Corporation or LLC and that entity is filing their returns late – causing all the others to be late as well. There are even situations when other entities are filing timely and it can cause you to be late. An example of this would be if you were a beneficiary of an irrevocable trust. These types of trusts generally have the same due dates that your personal returns do – April 15, with a six month extension to October 15. What if the trust is completed at the end of the day on October 15? Will the beneficiary be able to get their K-1 tax document and provide to their accountant to finish before midnight!! Maybe not!
So what do you do if you still cannot file by October 15? Is there any hope? There are some specific exceptions for military service members and taxpayers working abroad, but if you do not qualify for those exceptions, what then? One option would be to wait until the information is received and then file the return requesting penalty relief for reasonable cause. This is a tough row to hoe in actuality, because the IRS places a high degree of responsibility on the taxpayer: I can almost guarantee you that what you feel is reasonable will not be the same as what the IRS feels is reasonable! You will be categorized as delinquent from the outset, and then you will start on the defensive.
A better solution in many cases would be to go ahead and file a tax return with the information available and your best estimate of any missing information. (There are provisions in the code that allow for estimates under certain circumstances.) A statement should be included with the return explaining the situation and the efforts made to obtain the information. You should also state the intent to amend the return if materially different from the actual information when it is available. This would prevent a late filing penalty from being assessed, and you would be categorized as timely filed unless the return is challenged by audit.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
SIMPLE-IRA – 10 Days Left!
Filed under: Retirement Assets | Tags: 401(k), employer match, IRA, October 1, retirement, Savings Incentive Match Plan for Employees, self-employed, SEP-IRA, SIMPLE, SIMPLE IRA, small business
Leave a Comment Originally published in the Cedar Street Times
September 21, 2012
If you started a business in 2012 or have an existing small business, you have ten days left (October 1) until the annual deadline to establish a SIMPLE-IRA if you want to make contributions this year for yourself or your employees. A SIMPLE-IRA is a solid retirement option for small businesses for a number of reasons. The first reason is that they are free and easy to set-up. By comparison, if you start a plan such as a 401(k), you can bank on approximately$1,000 a year in administrative fees. The SIMPLE-IRA (Savings Incentive Match Plan for Employees) is established by filling out an easy form (IRS Form 5304-SIMPLE) and signing and dating it. You also need to contact a custodian which will be responsible for initially handling the funds. If you have a financial advisor, this person will often be the point-person. Otherwise, you can contact Vanguard, Fidelity, Schwab, or a number of other financial companies and they will be happy to set you up at no charge in minutes. They may have account fees, but those should be minimal.
The SIMPLE-IRA allows the employees (and the owner) to contribute up to $11,500 of their wages through payroll deductions into a retirement account. This directly reduces their taxable wages. The other part is the employer match. Each year, before the year starts, the employer chooses a one, two, or three percent match, or a two percent guaranteed contribution. If the employer chooses one of the match options, they will match the employee’s (and their own) contributions dollar-for-dollar up to a cap of one, two, or three percent of the employee’s annual wages. The match is tax deductible by the business but is not taxable income to the employee. A business can choose to exclude employees that are not expected to make over $5,000 during the year or have not made over $5,000 in any two prior years (whether or not consecutive).
Self-employed individuals with or without employees can also take advantage of this plan. If you are a sole proprietor, your wages are determined by your net income at the end of the year. You must submit your contributions by January 30 of the following year. The match for your employees and yourself does not have to be submitted until the tax return due date.
Self-employed individuals with no employees that net over $70,000 may wish to consider a SEP-IRA since you can contribute more at that point. A SEP-IRA is also easy and inexpensive to maintain.
Of course, the best reason to set up a SIMPLE plan is to start contributing to your retirement and helping others see the value as well.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Timeshare Tax Issues
Filed under: General, Rental Property | Tags: deed, fee-simple, property tax, real estate, right to use, second home, timeshare, timeshares, vacation home
Leave a Comment Originally published in the Cedar Street Times
September 7, 2012
Timeshares sound like a great idea, but you need to be very careful and do your research before acquiring one. After the timeshare honeymoon is over, owners often find themselves stuck with an unwanted monthly or annual financial obligation and an “asset” that is very difficult to sell or even give away. It is so bad that there are even organizations out there that will charge you a fee to take the timeshare off your hands! Besides these issues, there are also some tax pitfalls for the unwary.
When you attend a sales presentation you will likely be told that your interest and taxes on the timeshare are deductible just like your primary home and that you can rent out the timeshare like a rental property if you choose. Do yourself a favor and do not take tax advice from your timeshares sales representative. The large majority of timeshares in the U.S. are fee-simple interests in real property- meaning you have a deed to a specific property with all the burdens and benefits of ownership as your home likely is. If you take out a mortgage to buy the timeshare; if the mortgage is secured by the deed to the property; and if you treat it as your second home for tax purposes, you will typically be able to deduct the interest. (Note that if you bought the timeshare with a loan not secured by the property or on a credit card, you would lose the interest deduction.)
There are, however, an increasing number of timeshare interests that are written as “right to use.” These are essentially leases and are often coupled with points systems (some points systems are still tied to a fee-simple deed). If you have a right to use contract, you will be disqualified from deducting the interest. One way to solve this problem would be to pay for the timeshare with a line of credit secured by your main home: you can deduct mortgage interest on the first $100,000 of debt regardless of what you buy with it.
In a similar parallel, real property taxes must be assessed against an interest in real property. They also must be broken out from maintenance dues and other fees. Surprisingly, some timeshare operators do not split this out on your statements, and you may have to call to get this information.
If you rent out your timeshare, you are presumed to be subject to the vacation home rules (see my prior two articles) limiting your deductions to the income generated. In other words you cannot take a loss as you may with a regular rental property. This is because vacation home rules take into account the activity of all owners. For timeshares this means you have to count the personal use of the other 25-50 owners that have a week or two interest in the property as well! The courts and the IRS have different views on the precise application, but either way, it is still not tax friendly.
Finally, if you are able to sell your timeshare, resulting in a nearly guaranteed loss, it will generally be a nondeductible personal loss.
Buyers beware!
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Renting Your Vacation Home – Part II
Filed under: Rental Property | Tags: 14 days, fair market value, landlord, personal use, rent, rental property, schedule E, vacation home, vacation rental
Comments (2) Originally published in the Cedar Street Times
August 24, 2012
Two weeks ago I explained that any personal use of a vacation home you claim as a rental property on your tax returns would have some negative tax ramifications. Your homework was to count the days of personal use (as defined in my prior article – very important) and the days actually rented, and this week I would tell you what it means. Here we go!
If your personal use exceeded the greater of 14 days or 10 percent of days rented at fair market value during the year, your property is considered a personal residence. Your first tax hurdle is prorating the expenses based on personal use and days rented. Generally speaking, unless the expense is directly related to the renter’s stay (such as the clean-up fee after a renter leaves), you must divide the number of days of personal use by the sum of the number of days of personal use plus days actually rented, and then multiply the expenses by that ratio. That portion will be disallowed as a personal expense and will be nondeductible. (Note, it is not days of personal use divided by 365 days.) So if you use the property for 30 days and you only rent it for 60 days, 1/3 of the expense will be disallowed (30/ (30+60) = 33 1/3 percent. Furthermore, your expenses will be capped at the amount of gross income generated by the property, with the exception of the real estate taxes and mortgage interest. The personal use portion of the taxes and interest will often be allowable as an itemized deduction on Schedule A. Qualifying expenses in excess of the cap, can be carried forward to the following year.
If your personal use was less than the greater of 14 days or 10 percent of days rented at fair market value, then it is the same as the above, except your expenses are not capped at the gross income generated by the property. Note that you still have to prorate your expenses and disallow a portion for personal use. Even if you use the property for one day, part of the expenses will be disallowed.
If your personal use was more than 14 days and you rented it for 14 days or less, you do not declare the income on your tax returns. You also do not declare expenses except for taxes and interest that may be deductible on Schedule A. (You may hear of people renting out their home for a golf tournament and paying no tax on the income – this is how they do it.)
The point of these rules is simply that the IRS does not want people taking tax write-offs related to the personal use of a vacation home. The rules are strict and defined because of the potential abuse. You can imagine the IRS’ view when they perceive someone with a luxury second home in a vacation destination used frequently by the owners and their friends for free, rented at $20 a night to some acquaintances to cover the cleaning fee, and then only rented out at fair market rates a few weekends of the year, all the while trying to write the entire activity off as a tax deduction! It is not a business venture in that light. So if you want to maximize your deductions, limit your personal use and maximize days rented, or simply eliminate your personal use. There are additional rules beyond the scope of this article, but these are the big ideas to understand.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Renting Your Vacation Home – Part I
Filed under: Rental Property | Tags: fair market value, landord, personal use, rent, rental property, schedule E, vacation home, vacation rental
Comments (2) Originally published in the Cedar Street Times
August 10, 2012
August is here; summer is slipping away; and families are fitting in last-minute vacations before school is about to start. Perhaps you are one of the landlords collecting a little more rent to help battle the bottom-line. A good topic for you to review is whether or not you understand the tax laws relating to a vacation rental home. In my experience, most landlords and a fair amount of tax return preparers could use a refresher on this topic, or maybe the beginner lesson they missed! I warn you that the rules are less friendly than you may realize, however, I am not a believer that ignorance is bliss, and I can guarantee you that the IRS is not.
The crux of taxation on a vacation home comes down to “personal use” of the property. If you remember anything at all from this article, it is that EVERY day of personal use cuts into your tax deductions. One of the most proliferated errors on this topic is that the landlord can use the property for up to two weeks a year with no negative ramifications. This is categorically incorrect; the laws are spelled out quite clearly in Internal Revenue Code Section 280A and related Treasury Regulations.
It is also important to understand what the IRS means by “personal use.” Personal use includes any use of the property by any of the owners, their family members (sibling, spouse, ancestors, descendants of any owners), or anyone else with free use or paying less than fair market rent. Even if a family member pays fair market rent, it is still considered personal use unless it is their primary residence. The only way for any of those members to be present and not have the property counted as personal use is if they are working on the property. The IRS even defines quite strictly what working on the property entails – it is sufficient to say that an eight-hour workday for everybody present is requisite, and the IRS could ask to see work logs, receipts, etc.
I think this expansive definition of personal use nails about 99 percent of people with a vacation home, right!? After all, most people that have a vacation home bought it or kept it because they like the place and enjoy staying there!
So now that you have determined you likely have personal use of your property, how does this affect the taxation? Your homework is to count up the days of personal use you anticipate for 2012, and the number of days you expect to rent it, and in two weeks I will tell you what it means.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Donating Your Bald Eagles and Blue Jeans
Filed under: Charitable Donations, Trusts and Estates | Tags: appraisal, Art Advisory Panel, Bald and Golden Eagle Protection Act, charitable contributions, charitable deduction, Estate Tax, IRS, noncash donation
Leave a Comment Originally published in the Pacific Grove Hometown Bulletin
August 1, 2012
If you missed the July 22 issue of the New York Times, you missed a great article about estate tax the IRS is trying to levy on a piece of art that includes a genuine stuffed bald eagle. The IRS has valued the piece of art at $65 million and wants the heirs of New York art dealer Ileana Sonnabend to pay approximately $29.2 in estate tax.
The rub, however, is that it is illegal to sell the piece of art due to the 1940 Bald and Golden Eagle Protection Act. The heirs and their appraiser are of course contending the value is $0 since they cannot legally sell it – how can it have value? The IRS Art Advisory Panel reportedly called it a “stunning work of art” and is contending that it could be sold illegally on the black market and therefore has value. It sounds to me like our government wants to have it both ways – you cannot sell it but, we are still going to tax you as if you could. I think our tax policy should promote legal activities!
The end of the article mentions a possible charitable donation instead. I suppose this could be an option for the heirs. Unfortunately, the estate tax would not be eliminated, since the heirs would be the donors and not the decedent. They would also have to be able to absorb a $65 million donation in a six year period against their income. IRS law allows you to make a charitable contribution up to 50% of your income each year which can be carried over for up to five more years. After that, you lose the rest permanently. One strategy for large noncash gifts is to give a partial interest in the item each year and loan the rest to the charitable organization. This way, you do not lose any of the valuable deductions.
It is important to remember that current IRS law requires an appraisal for donations over $5,000. This would also include multiple gifts during the year of similar items that add up to over $5,000. So if you are taking lots of trips with household items and blue jeans, just make sure it does not go over $5,000 during the year. It is hard to get an appraisal on a pair of jeans you donated eight months ago. Oh, and be sure to get your charitable gift receipt!
Regarding the bald eagle art – I sure am glad Mrs. Sonnabend did not leave it in her will to me – sounds more like a white elephant from my perspective!
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 